In August 1985, Apple Inc. (NASDAQ:AAPL) was trading near $1.81, the same year Steve Jobs left the company. The year of his return in 1997, Apple was in danger of extinction, with its share price trading near $3.18 in December 1997.
Apple ‘s share price closed last week at $376.99, registering a market capitalization of about $350 billion, running neck-in-neck with Exxon Mobil (NYSE:XOM) for the title of America’s largest company. On July 26, 2011, Apple’s shares reached a record high of $404.5, with an associated market capitalization of about $375 billion. It seems Apple is on its way to possibly becoming America’s first $1 trillion technology company, and whoever is to dethrone Apple must have such potential.
The Nine Hurdles
For a technology company to be able to take a bite off Apple, it must overcome the same nine hurdles that Apple managed to overcome: 1- Innovation & Creativity, 2- Miniaturization, 3- Design, 4- Integration, 5- Durability, 6- Service, 7- Marketing, 8- Pricing, 9- Management. Such hurdles don’t necessarily have a fixed height; depending on how high some of them can be cleared, and as long as a balance is maintained amongst all, some of the other hurdles can be forgiving.
Innovation & Creativity
Apple gained its fame with the Macintosh computer. It regained its fame with the introduction of the I-Pod. It solidified its fame with the I-Tune. It expanded its fame with the I-Phone and I-Pad. On average, Apple makes a splash with a creative and innovative product about once every 3 years. Most importantly, Apple’s innovation and creativity covers hardware, software and content.
Remember those first cell phones of the 70s? When using them, you looked as if you were holding an encyclopedia volume to your head? Remember in the 70s when some walked around with a “boom box” on their shoulder, or pilot-sized headphones on their heads? No matter how innovative and creative a product is, if it is not miniaturized, it is unlikely to survive. Furthermore, next generation versions of a product seem to always pack more in less space. That was the power of the I-Pod, I-Book, the I-Pad, the I-Phone, the MacBook Air.
Apple has always excelled in its designs: elegance, simplicity and modernity. From its desktops, to its laptops, to its software, to even its flagship stores, Apple looks good. Design is what protects a brand from becoming generic. Once a product becomes generic, its margins disappear into thin air as it must compete with the ever cheaper competition. Furthermore, design gives cache. For some, it even provides status, and justifies spending what it takes to get the product. Clearing this hurdle very high will provide flexibility on the pricing hurdle. Some will pay extra just because it is an Apple.
One of the reasons why Apple almost went out of business two decades ago was lack of compatibility. One of the reasons it started making a comeback was its Microsoft deal in 1997 with Microsoft product compatibility. As for recent successes and looking into the future, now that Apple has achieved deep market penetration, it can maintain and build on such leadership through product integration of the home, the office, the car, the outdoor, (and possibly the plane and space in the future…) It is not only about integrating products. It is about integrating lifestyles. Apple has become a lifestyle. It blends work, leisure, athletics, arts and more, and provides an elegant lifestyle. For example, while you are running, distance, speed and calorie data is transmitted from your shoe sole to your I-Pod for instant analysis, while you relax to your favorite music; perfect integration of various products providing you an elegant lifestyle.
A key challenge to miniaturization is durability; it is not only about shrinking products, but it is also about making sure quality is not sacrificed. Software must also be durable with minimal crashes, and constant upgradability. Apple has held such advantage from day one. When you turn on a Mac computer, what you see is the operating system. There is no DOS running in the background; that minimizes glitches and crashes. No product can be guaranteed from never breaking down, and in such case, you must provide top quality service. Apple has done a good job in such regards, and provides flexibility of taking products in person to its flagship stores.
Apple has often excelled at marketing. Remember the “1984” commercial during Super Bowl XVIII? Apple also often makes big news splashes and product launches at conferences and conventions such as the Apple World Wide Developers Conference. Such events are often sold out. When it comes to marketing and advertising, Apple often goes all out. It is important to note that Apple also had its marketing difficulties; otherwise it would not have faced possible collapse more than 14 years ago. It was a long process learning curve, but now Apple’s marketing reach has become enviable.
This is the most controversial hurdle of all. Everyone knows that Apple products are not cheap. Yet, Apple is doing fine. The key is in the design, as we stated earlier. In a sense, Apple has also become a status symbol. The bundled value provided by design, miniaturization, integration, innovation & creativity has afforded Apple the ability to price its products at a premium. Still, it is tricky to know what is that optimum premium that maximizes profits; naturally, Apple cannot price its products totally out of reach, but it seems Apple has a good sense of a pricing strategy that has proven to work.
At the end of the day, a company is about its people. When Steve Jobs was absent from Apple, the company languished. Upon his return, the company flourished. Management must provide the perfect atmosphere to its employees to achieve the above 8 hurdles. There is no question that Steve Jobs has a lot to do with Apple’s success. However, it is highly unlikely he did it all on his own. As a company matures, as long as it is true to its vision, mission and philosophy, and as long it continues to be able to attract the brightest minds, it will flourish. Apple is well managed, as is evident by Steve Jobs extended health leaves.
So, who will take a bite off Apple?
Google (NASDAQ:GOOG)? Facebook? Twitter? Microsoft (NASDAQ:MSFT)? Yahoo (NASDAQ:YHOO)? IBM? These are great companies, but it is unlikely they will take a bite off Apple. As a matter of a fact, it is more likely that Apple will take a bite off them. Apple has achieved an unbeatable package (design, miniaturization, integration, innovation & creativity) that has created a massive barrier to entry for others. Its stronghold on hardware, software and content, all targeting a modern coveted lifestyle, will take years to achieve by others, while Apple will continue to pull ahead of them...
As stated, Apple is about its people. Could a group of Apple employees leave and create an equally successful company? Highly unlikely. Steve Jobs himself was not able to create the success he created at Apple when he founded Next Computer. In addition, the current resources of Apple, including over 560 patents and $70 Billion in cash and liquid assets are hard to replicate.
How about an economic slowdown and market turmoil? Remember the turmoil of 2008, although Apple shares dropped from a 2008 high of about $200 to a low of about $78 during such turmoil, today the price stands at about $377.
What can take a bite out of Apple is a radical shift in technology. It cannot be foreseen. It must be a breakthrough technological discovery which Apple cannot capitalize on. That does not seem to be in the cards during the next few years. Otherwise, only Apple can take a bite off Apple due to severe mismanagement, which also does not seem to be in the cards at this time.
With interest rates expected to remain low through 2013, and Apple profits expected to increase to over $32.1/share for the year ending September 2012, it seems Apple shares have additional room to the upside and continue to be attractive at these levels.
Disclosure: I am long KFT.